Sell or Hold? How to Review Your Stocks in a Weakening Market

02/06/2013 07:49 PM ET

We all know the market is “cyclical” — but not everyone knows how to properly handle those cycles. That’s because many people don’t understand the big — and undeniable — impact a change in overall market direction has on their own individual stocks.

If you’ve been with IBD a while, you know that 3 out of 4 stocks move in the same direction as the overall market. So in an uptrend, 75% of stocks will move up. And when the market goes down, it takes 3 out of 4 stocks down with it.

So take defensive action as the market shows signs of selling pressure and begins to roll over into a correction.

That’s the easy part: Just check the Market Pulse in The Big Picture. If institutional selling starts to increase, the Current Outlook will shift to “Uptrend under pressure” and eventually “Market in correction.”

2 Questions to Help Decide Whether to Sell or Hold

If you take a minute to read The Big Picture each day, you’ll always know if the market uptrend is running into trouble — and if leading stocks are starting to stumble. That’s your cue to get ready to protect yourself.

The following questions will help you decide what action to take.

1. How big a gain are you sitting on in your stock?

If you have a large gain: That gives you more flexibility. Depending on how your stock is behaving, you could choose to hold and see if it finds support and holds up relatively well.

If you do choose to hold, be sure to set a target sell price. You never want to let a good gain completely disappear, so have a profit-taking plan in place. You can also choose to sell a portion of your shares. That lets you lock in some guaranteed gains, but still keep a position in the stock.

If you have a small gain or loss: It’s much riskier to hold in this situation. You run the risk of breaking 2 key rules:

 Never let a good gain disappear.  Don’t let a small loss become a big one.

2. How is your stock behaving?

This is where using charts gives you a huge advantage. By checking the price and volume action, you can see if institutional investors are starting to sell more aggressively, or if they’re basically sitting tight and supporting the stock. (Watch the Sell or Hold? video to see examples of warning signs in a chart.)

Here are some basic things to consider: Is volume on UP days becoming lighter, and volume on DOWN days becoming heavier? That’s a sign of institutional selling. Is the stock starting to close near the bottom — instead of the top — of the daily and weekly price range? That’s another warning sign. If the stock is testing its 50-day or 10-week moving average line, is it finding support or is it crashing below it on heavy volume? A sharp drop below these benchmark lines on higher-than-normal volume means at least some big investors are selling — rather than supporting — the stock.

Don’t Forget Earnings Season

Here are some tips on what to do if the market is weakening during earnings season:

 Make sure you know when your stock reports. Have a selling game plan in place ahead of time: For example, you might sell at least some of your shares ahead of earnings to reduce your exposure to a sudden downswing. You could also put in a stop-loss order that will get triggered if the stock suddenly drops right before or after it reports. See how other leading stocks are reporting and how the market is reacting: Are stocks generally beating estimates and moving higher? Or are they missing and getting crushed? That will tell you a lot about what kind of earnings season we're in and how you should handle it.

Select market data is provided by Interactive Data Corp. Real Time Services. Price and Volume data is delayed 20 minutes unless otherwise noted, is believed accurate but is not warranted or guaranteed by Interactive Data Corp. Real Time Services and is subject to Interactive Data Corp. Real Time Services terms. All times are Eastern United States. *Reflects real-time index prices.